A black swan event is a term coined by Nassim Nicholas Taleb and it works as a metaphor that describes an event that comes as a surprise and has major consequences. These kind of events are rare and its occurrence deviates beyond what is normally expected of a situation and can create substantial damage and chaos. Black Swans without any doubt are extremely difficult to predict, even in a time of sophisticated trading real time, risk management and predictive capital market algorithms.
The Black Swan term sums up what is happening in the hedging volatility of markets after the currency move by the Swiss National Bank and it displays something holistic we perceive at this moment in the world’s fragile and sensitive economy.
This disruptive and influential theory was developed and highlighted by Nassim Nicholas Taleb, a finance professor and former Wall Street trader, in the book with the same name of 2011. This influential concept was drafted, introduced it before in Taleb other 2001 book Fooled By Randomness, which concerned financial events and the power of random events and things that changes the normal trajectory of things.
The pillars of the Black Swan concept can be summarised in these 3 points in Taleb’s words:
- “The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
- The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
- The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.”
Unlike the earlier concepts and philosophical “black swan problem“, the Taleb “black swan theory” refers specially to unexpected events of large magnitude and consequence and their dominant role in history. This theory has become special relevant in the capital markets and trading world where the theory became a Bible for traders and part of the implicit DNA of trading.
Such special and unexpected events, that happen very fast in hawkard circumstance, considered extreme points of no return, or outliers, collectively play vastly larger roles than expected regular occurrences and shift actions and special the players. More technically, in another paper, Taleb describes in the scientific monograph Lectures on Probability and Risk in the Real World: Fat Tails, a more sophisticated mathematically explanation that highlights and translated the black swan problem as “stemming from the use of degenerate metaprobability”.
So yesterday move of the global markets after the Swiss National Bank’s sysmic shock move to stop intervening in its foreign exchange market, has been one of the biggest Black Swans of the last years for traders. Special only after three days the Swiss National Bank, Vice President Jean-Pierre Danthine had defined the Swiss Franc cap a “pillar” of monetary policy.
In these circumstances people and special traders, markets, brokers and investors don’t behave normally special when central banks don’t. This has created a butterfly effect in the global markets with riddle effects still difficult to predict.
This move all comes in the follow up of the European Central Bank big introduction of quantitative easing when it meets Jan. 22 2015. Switzerland is making its home work and somehow surrendering before a critical and polmic wave of post-QE money fleeing the euro that threatens to make a mockery of its currency policy. It’s also in the follow up of the lower oil prices that brings global deflation ever closer.
This move has been affecting the world markets, disrupting even big retail trading players of the industry such as FXCM with its Shares Trading down 85% in Pre-Market Trading and a Massive $225 Million Client Negative Balance Hit Due to CHF Volatility ). IG Group another massive world trading house disclaimed losses up to £30 Million, Tip of Industry CHF Volatility Losses. And the most radical case Alpari Uk entered in admnistration following up client losses. LCG Group also faced up to $2.5 Million Losses.
To add a more positive note Gain actually generated profit with this black swan Forex Industry black Thursday. Other retail trading players such as Saxo Bank and Mahih FX, CMC Markets, City Index continued with their businesses and trading operations despite the CHF Convulsion. Also IC Markets and Darwinex persisted despite Minimal Losses and Setbacks.
This exceptional market turmoil following up from the Swiss move has created and trickered a series of events and dsiruption and has extended its impact worldwise. Swiss stocks such as Swatch and Nestle fell sharly and in the same path Asian shares dropped with U.S. index futures, while Japanese and Australian government bond yields had record plunges.
This action by the Swiss National Bank taking will put in question the effective strenghts or weakness of the euro polemic currency adventure that started some 15 years ago.
Adding to the chaos coming from Swiss central bank unexpected moves there is the Russian ruble and its weakening economy that continues to lose buying power, and a lot of the big Oligark money that has been flowing into Switzerland from that country. The challenge now is how this will affect more the sensible and fragile Russian economy completely fragilised by the lower and lower prices of cheap oil.
No doubt this move by the Swiss National Bank is a black swan game changer. And its repercussion will probable continue as the ECB continues its path to a massive action that will intensify new actions and potential disruptions. The US economy probably will be the balance in this complex and fragile system.Investors and traders have to be wise at the moment and eventually move their portfolios to solid commodities. This is the case of gold that will be growing its value. Example of that is the move in its the price that keeps its trajectory of 4 month highs. Gold in these occasions is the traditional safe haven out of paper money.
Interesting also that the Swiss Central Bank did this less than some weeks before the global Davos World Economic Forum Annual Meetings – that are host in the Swiss Alpine City.
Be safe and wise if you are trading these days! and beware of the black swans riddle effects in the hedging volatility of the global economy.
Dinis Guarda is an author, speaker, serial entrepreneur, advisor and experienced CEO.
He creates and helps build ventures focused on global growth, 360 digital strategies, sustainable innovation, Blockchain, Fintech, AI and new emerging business models such as ICOs / tokenomics.
Dinis is the founder/CEO of ztudium that manages blocksdna / lifesdna. These products and platforms offer multiple AI P2P, fintech, blockchain, search engine and PaaS solutions in consumer wellness healthcare and life style with a global team of experts and universities.
He is the founder of coinsdna a new swiss regulated, Swiss based, institutional grade token and cryptocurrencies blockchain exchange. He is founder of DragonBloc a blockchain, AI, Fintech fund and co-founder of Freedomee project.
Dinis has created various companies namely Ztudium, a tech, digital and AI blockchain startup that builds cutting edge software, big data insights, publishes intelligenthq.com, hedgethink.com, tokensdna.com and tradersdna.com among others.
Dinis is the author of various books. His upcoming books “How Businesses and Governments can Prosper with Fintech, Blockchain and AI?”, also the bigger case study and book (400 pages) “Blockchain, AI and Crypto Economics – The Next Tsunami?” last the “Tokenomics and ICOs – How to be good at the new digital world of finance / Crypto” will be launched in 2018.
Some of the companies Dinis created or has been involved have reached over 1 USD billions in valuation. Dinis has advised and was responsible for some top financial organisations, 100 cryptocurrencies worldwide and Fortune 500 companies.
Dinis is involved as a strategist, board member and advisor with the payments, lifestyle, blockchain reward community app Glance technologies, for whom he built the blockchain messaging / payment / loyalty software Blockimpact, the seminal Hyperloop Transportations project, Kora, and blockchain cybersecurity Privus.
He is listed in various global fintech, blockchain, AI, social media industry top lists as an influencer in position top 10/20 within 100 rankings: such as Top People In Blockchain | Cointelegraph https://top.cointelegraph.com/ and https://cryptoweekly.co/100/ .
He has been a lecturer at Copenhagen Business School, Groupe INSEEC/Monaco University and other leading world universities.
He is a shareholder of the fintech social money transfer app Moneymailme and math edutech gamification children’s app Gozoa.
Between 2014 and 2015 he was involved in creating a fabbanking.com a digital bank between Asia and Africa as Chief Commercial Officer and Marketing Officer responsible for all legal, tech and business development. Between 2009 and 2010 he was the founder of one of the world first fintech, social trading platforms tradingfloor.com for Saxo Bank. In 2011 he created the B2B platforms socialmediacouncil.org and openbusinesscouncil.org with Jamie Burke.